James Piper, Tax Accountant: What is an automobile?

Friday, February 15, 2013

Case Citation

Myrdan Investments Inc v. The Queen (2013 TCC 35) [TCC] [CanLII]

Summary

An individual used a corporate-owned pick-up truck in carrying out his duties as employee and shareholder of Myrdan Investments Inc. The appeal focuses on the issue of whether the truck meets the definition of an “automobile” in subsection 248(1) of the Income Tax Act (ITA).

The minister took the position the truck was an automobile and assessed a taxable benefit for an employer-provided automobile and classified the property in Class 10.1 instead of Class 10. In reviewing the facts, the court found the truck met the exceptions in paragraph (e) of the definition. Namely, the truck was used, all or substantially all, for the transportation of goods, equipment or passengers in the course of gaining or producing income (paragraph (e)(ii)) and used primarily for those purposes in remote locations (paragraph (e)(iii)). Meeting either condition is sufficient to exclude a vehicle from the definition of being an automobile.

As a result, the employment benefits were dismissed; however, there was a personal element to the use of the pick-up truck and the taxpayer was assessed a benefit as a shareholder under subsection 15(1). The court assessed the shareholder benefit based on personal-use kilometres and the rate set by the Department of Finance for use in calculating benefits under paragraph 6(1)(k). It did so since it seemed reasonable given there was no known or reliable fair market value for renting such a truck.

Further the truck was placed in the company’s Class 10 pool. Class 10.1 only applies to a “passenger vehicle”, which is defined to be an automobile purchased or leased after June 17, 1987, over a certain value.

The minister argued the vehicle was not used to transport goods or equipment or passengers. At times there were passengers and the judge viewed the safety equipment and first-aid kit carried in the truck and required for work in the oil-fields of Alberta were sufficient to meet the definition.

Myrdan Investments Inc. held various shares and interests in private businesses. The minister argued the test on the vehicle’s use in the course of gaining or producing income should be limited to activities related directly to Myrdan and exclude any activity done for its investments. In finding for the appellant, the judge referenced an Interpretation Bulletin that addresses the issue of non-interest bearing loans to subsidiary corporations. In Canadian Helicopters Ltd. (2002 FCA 30) the Federal Court of Appeal agreed with the Tax Court of Canada that interest incurred to make the non-interest bearing loan was deductible since it enabled the company to increase its capacity to pay dividends and hence was a source of income for the parent. In this case, providing services to a subsidiary enhanced its ability to pay dividends and thus the truck was used in the purpose of gaining income from property.

This case is a reminder that the phrase “all or substantially all” is not set in stone as to mean 90% or more. Similarly, the phrase “used primarily” is flexible. In the judge’s words,

“The respondent has argued that “primarily” represents a standard of at least 50%; however, this standard, like the “all or substantially all” standard, is flexible.”

And, in a case cited by the judge, the phrases were described as elastic.

Issue

[1] These appeals from reassessments for the taxation years of Myrdan Investments Inc. (“Myrdan” or the “corporate appellant”) ending October 31, 2006 and October 31, 2007 and for the 2007 taxation year of Daniel Halyk (the “appellant” or “Mr. Halyk”) involve the question of whether a pickup truck is an “automobile” within the meaning of that term as defined in subsection 248(1) of the Canada Income Tax Act (the “ITA”) or whether the vehicle falls within the exceptions in subparagraphs (ii) and (iii) of paragraph (e) of that definition.

[21] …The central issue remaining in these appeals is the use of the truck owned by Myrdan and operated by Mr. Halyk. An inquiry into the use of the truck will determine whether it is an “automobile” pursuant to the definition in subsection 248(1) of the ITA what method should be used to calculate the shareholder benefit to Mr. Halyk. If the truck was not an automobile, it was properly classified by the taxpayer as class 10 capital property. If the truck was an automobile, the Minister’s assessment on the basis that the truck was a “passenger vehicle” included in class 10.1 is correct. The definition of “passenger vehicle” includes an automobile. The appellant’s position is that the truck is not an automobile, since it falls within either or both of the following exclusions in subparagraphs (ii) and (iii) of paragraph (e) of the definition of “automobile”:…

[22] The respondent’s position is that the truck meets the requirements for neither of the above exclusions.

[23] In respect of Mr. Halyk’s appeal, the issue is whether he received a benefit taxable under subsection 15(1) of the ITA and, if so, what the value of that benefit was. If the truck was an automobile, the value of the shareholder benefit is calculated under subsection 6(2) of the ITA. If the truck was not an automobile, the value of the shareholder benefit must be determined by other means. In the reassessment for Mr. Halyk’s 2007 taxation year, the Minister assessed a shareholder benefit of $13,811 in respect of a passenger vehicle stand by charge and $3,872 in respect of passenger vehicle operating costs.

ITA / ETA

Cases Cited

547931 Alberta Ltd. v. The Queen, 2003 TCC 170 (CanLII)
| Lyncorp International Ltd. v. Canada (2011 FCA 352) |
| Lyncorp International Ltd. v. The Queen (2010 TCC 532) |
| McHugh (B.J.) v. Canada ([1995] 1 C.T.C. 2652) |
| Pronovost v. The Queen (2003 TCC 139) |
Walsh v. The Queen, 2009 TCC 557 (CanLII)
| Canadian Helicopters Ltd. (2002 FCA 30) |

Analysis

[8] In order to fulfil his duties as CEO of Total Energy, Mr. Halyk was required to travel to a number of locations to perform business operations necessary for Total Energy. Total Energy entered into an agreement with Myrdan whereby Myrdan would receive management consulting fees and a monthly allowance for the operating expenses with respect to a vehicle that was suitable for Mr. Halyk’s purposes as CEO of Total Energy. The capital cost of the vehicle would be covered by Myrdan, and the expense involved in operating it for the purposes of Total Energy’s business would be covered by Total Energy.

3.2 Was the truck an automobile?

3.2.1 Was the appellant transporting “goods” or “equipment” in the course of gaining, earning or producing income?

3.2.2. Can work for all the businesses visited by Mr. Halyk be counted as use in gaining, earning or producing income for Myrdan?

[29] The evidence shows that Mr. Halyk did use the equipment in question here on safety stand-down tours, for example and was required to wear the safety equipment in order to have access to work sites, besides which he had to set an example for the staff in the various businesses Myrdan and Total had invested in. These instances of the use of safety equipment had a clear income-producing purpose. My finding on this point is consistent with the Court’s finding in Pronovost v. The Queen[5] (also an informal procedure case), where equipment such as tools and first aid kits was kept in a truck at all times but was still “transported” for the purposes of the exclusion in the definition of “automobile”.

3.2.2[3]. Can work for all the businesses visited by Mr. Halyk be counted as use in gaining, earning or producing income for Myrdan?

[31] The respondent submits that the tests for determining use of a vehicle in producing income can only apply to income earned for the owner of the vehicle, i.e., Myrdan. Therefore, Mr. Halyk’s use of the truck in the other businesses owned by Myrdan and Total Energy should not count in applying the use tests in subparagraphs (ii) and (iii) where the connection to income earned by Myrdan is too remote.

[34] The respondent relies on Lyncorp International Ltd. v. The Queen,[6] to exclude the kilometres travelled by Mr. Halyk to visit the Theo Halyk Company, a wholly owned subsidiary of Myrdan. In that case, Lyncorp, the appellant corporation was denied the deduction of expenses incurred by its owner for travel to businesses in which it had invested. Lyncorp paid the expenses for that individual’s travel to provide support services gratuitously to the businesses. The Court in Lyncorp held that the connection to Lyncorp’s income from business or property was too tenuous, since Lyncorp would only profit from these expenses by receiving future dividends from its investments in the business venture if they were profitable.

[35] The position adopted by the respondent with respect to travel to and from the Theo Halyk Company, is at odds with the CRA’s position concerning the application of paragraph 20(1)(c), which set out the requirement to be satisfied with respect, to the deduction of interest on borrowed money. The provision provides that the borrowed money must be used for the purpose of earning income from a business or property in order for interest to be deductible. The CRA accepts that interest on borrowed money used to make an interest-free loan is nonetheless deductible in the following context:

25. Interest expense on borrowed money used to make an interest-free loan is not generally deductible since the direct use is to acquire a property that cannot generate any income. However, where it can be shown that this direct use can nonetheless have an effect on the taxpayer’s income-earning capacity, the interest may be deductible. Such was the case in Canadian Helicopters where in the court found that there was a reasonable expectation on the part of the taxpayer of an income-earning capacity from the indirect use of the borrowed money directly used to make an interest-free loan. Generally, a deduction for interest would be allowed where borrowed money is used to make an interest-free loan to a wholly-owned corporation (or in cases of multiple shareholders, where shareholders make an interest-free loan in proportion to their shareholdings) and the proceeds have an effect on the corporation’s income-earning capacity, thereby increasing the potential dividends to be received. These comments are equally applicable to interest on borrowed money used to make a contribution of capital to a corporation of which the borrower is a shareholder (or to a partnership of which the borrower is a partner). A deduction for interest in other situations involving interest-free loans may also be warranted depending upon the particular facts of a given situation.[7]

It is reasonable to infer that the service provided by Mr. Halyk to the Theo Halyk Company enhanced that corporation’s ability to pay dividends to Myrdan. Moreover, Lyncorp is distinguishable on the basis that none of Lyncorp’s subsidiaries were wholly owned by it.

3.2.2[4] The “all or substantially all” test: use to transport goods, equipment or passengers in the course of gaining or producing income

[39] In Pronovost, Associate Chief Judge Bowman (as he then was) pointed out:

The 90% rule used by the CCRA has no statutory basis although it may be necessary that some sort of rigid criterion be applied administratively. That does not mean that the court must follow it . . . [9]

[40] In 547931 Alberta, Judge Bowie adopted a similar view:

. . . [i]f Parliament had intended that 90%, or any other fixed percentage, should govern, then it would have expressed that in the statute, rather than using what is obviously, as Judge Bowman put it in Ruhl v. Canada, an expression of some elasticity. . . [10]

[41] In Ruhl v. Canada, Judge Bowman (as he then was) discussed the flexibility that the courts are entitled to show in interpreting terms such as “primarily” and “substantially all”:

The terms “substantial” or “substantially all” are expressions of some elasticity. It has been said that they are an unsatisfactory medium for carrying the idea of some ascertainable proportion of the whole. They do not require a strictly proportional or quantitative determination.[11]

[42] In light of the above, the appellants have demonstrated that they have satisfied the “all or substantially all” test in subparagraph (e)(ii) of the definition of “automobile” in subsection 248(1) of the ITA.

3.2.5 The “used . . . primarily” test: use to transport goods, equipment or passengers in the course of earning or producing income in remote locations

[43] The appellants have also demonstrated that the use of the truck brings it within subparagraph 248(1)(e)(iii) of the definition, which requires use primarily for income-earning or -producing purposes in remote locations. The respondent has argued that “primarily” represents a standard of at least 50%; however, this standard, like the “all or substantially all” standard, is flexible.

[49] The respondent has argues that two other trips in Mr. Halyk’s summary chart should be excluded from the subparagraph (iii) calculation, on the basis that no passengers or equipment were transported. Specifically, they are the trips to Rocky Mountain House from January 22 to 26, 2007 (410 km) and to Lloydminster and Estevan on September 5 to 10, 2007 (2,630 km). Indeed, no passengers are recorded on the summary chart. However, as discussed above, the evidence shows that Mr. Halyk was at all times transporting equipment for use in earning or producing income.

4.1 Mr. Halyk’s benefit

[50] Because the truck is not an automobile, the automobile benefit provisions in subsection 15(5), paragraph 6(1)(e), subsection 6(2) and paragraph 6(1)(k) of the ITA do not apply.

[51] The respondent did not make any proposal with respect to how Mr. Halyk’s shareholder benefit should be calculated if, as I have concluded, the truck is not an automobile. The appellants’ position is that this Court should rely on the method described in McHugh (B.J.) v. Canada.[13] Where the personal use of property is incidental to the business purpose for which the property was acquired, McHugh suggests a valuation approach based on the “fair rental value” of the shareholder’s actual use of such property owned by the corporation.

[52] McHugh does not mandate a method for determining the fair rental value of a vehicle that is based on actual use. In the absence of market information about the fair rental value of a truck such as the one used by the appellant, it appears reasonable to apply the statutory rate that is used to calculate the employee benefit for personal use of a passenger vehicle. Applying the 22-cent rate to 4,320 personal use kilometres, the shareholder benefit works out to $950.40.

Decision

[53] For the reasons noted above and taking into account the Minutes of Settlement entered into by the parties and filed at the hearing, the appeals are allowed and the reassessments are referred back to the Minister for reconsideration and reassessment on the basis that:

Myrdan’s taxation year ending October 31, 2006

a. Myrdan did not carry on a personal services business.

b. The income earned by Myrdan in the course of providing services to Total Energy Services Inc. was income from an active business.

c. Myrdan is entitled to additional advertising expenses of $4,097.

d. Myrdan is entitled to additional insurance expenses of $746.

e. Myrdan is entitled to additional repairs and maintenance expenses of $1,147.

f. Myrdan is entitled to additional travel expenses of $3,217.

g. Myrdan is not entitled to any additional expenses other than those noted above.

Myrdan’s taxation year ending October 31, 2007

1. Myrdan did not carry on a personal services business.

2. The income earned by Myrdan in the course of providing services to Total Energy Services Inc. was income from an active business.

3. Myrdan is entitled to additional advertising expenses of $4,676.

4. Myrdan is entitled to additional insurance expenses of $1,044.

5. Myrdan is entitled to additional repair and maintenance expenses of $1,406.

6. Myrdan is entitled to additional travel expenses of $3,978.

7. The assessed capital cost allowance (“CCA”) with respect of the Motor Home of $12,000 shall remain as assessed;

8. Myrdan’s pickup truck is automotive equipment within class 10 of Schedule II to the Income Tax Regulations and is not a passenger vehicle within class 10.1.

Mr. Halyk’s 2007 taxation year

1. The assessed personal use benefit with respect to the Motor Home of $6,544 shall be removed from income.

2. The assessed operating costs with respect to the Motor Home of $1,785 shall be removed from income.

3. Mr. Halyk’s personal use of Myrdan’s (pickup truck) resulted in an aggregate taxable benefit of $950.54.

Note

A paragraph beginning with a number in square brackets is a direct quote from the case.